Travelzoo 2019 Q2 Form 10-Q Summary
Business Context and Reporting Period
Travelzoo provides travel, entertainment and lifestyle deals through websites, mobile applications, email publications, the Travelzoo Network, Local Deals, Getaways and a hotel booking platform. Revenue is generated primarily from advertising fees and transaction-based commissions. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Travelzoo reported approximately 30.2 million members and operated through Asia Pacific, Europe and North America segments.
Financial Results and Key Metrics
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Revenue | $28.2 million | $28.1 million | $59.0 million | $59.0 million |
| Gross profit | $25.4 million | $25.1 million | $53.3 million | $52.6 million |
| Gross margin | 90.2% | 89.3% | 90.3% | 89.1% |
| Income from operations | $2.4 million | $1.1 million | $7.4 million | $4.7 million |
| Operating margin | 8.6% | 3.8% | 12.5% | 8.0% |
| Net income | $1.3 million | $0.5 million | $4.4 million | $3.0 million |
| Diluted earnings per share | $0.11 | $0.04 | $0.36 | $0.24 |
| Operating cash flow | Not separately provided | Not separately provided | $1.6 million | $0.8 million |
Q2 revenue increased 0.4%, while six-month revenue was essentially flat year over year. Gross profit increased because cost of revenues declined 8.6% in Q2 and 10.9% for the six-month period. Operating expenses decreased 4.1% in Q2 and 4.0% for the six months, primarily reflecting lower product development costs and lower compensation-related expenses. The effective tax rate was 42% in Q2 and 38% for the six months, compared with 57% and 40%, respectively, in the prior-year periods.
At June 30, 2019, cash and cash equivalents were $14.1 million, compared with $18.0 million at December 31, 2018. Including restricted cash, total cash, cash equivalents and restricted cash was $15.4 million. The company had no reported debt borrowings; however, it recorded $16.5 million of operating lease liabilities under ASC 842, including $5.7 million current and $10.8 million long-term. Total stockholders’ equity was $14.2 million.
Material Changes Versus the Prior Comparable Period
- North America revenue increased 2.3% in Q2 and 1.2% for the six months; operating profit increased to $3.6 million and $8.1 million, respectively, from $2.1 million and $5.5 million.
- Europe revenue increased 2.1% in Q2 and 2.5% for the six months, aided by increased vacation-package bookings. Operating profit increased to $0.6 million in Q2 and $2.7 million for the six months.
- Asia Pacific revenue declined 23.5% in Q2 and 20.6% for the six months, primarily because of fewer emails sent and fewer Local Deals vouchers sold. The segment operating loss widened to $1.8 million in Q2 and $3.4 million for the six months.
- Travel revenue increased 1.7% in Q2 and 1.7% for the six months, while Local revenue declined 7.4% and 10.0%, respectively, reflecting lower voucher activity.
- Member count increased 1.0% to 30.2 million, but consolidated average cost per acquired member rose to $3.40 from $2.58. Revenue per member increased to $3.97 from $3.83.
- Operating cash flow increased to $1.6 million from $0.8 million, but cash declined $4.0 million after $6.5 million of stock repurchases and $0.7 million invested in WeekenGO.
- Travelzoo adopted ASC 842 on January 1, 2019, recognizing operating lease right-of-use assets of $14.1 million and operating lease liabilities of $16.5 million at June 30, 2019.
- Travelzoo invested an additional $673,000 in WeekenGO, increasing its ownership interest to 26.6%. The company recorded $409,000 of WeekenGO-related losses and basis amortization for the six months.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal revenue or earnings guidance. Management expects cash on hand to fund working capital needs for at least the next twelve months, while noting that unanticipated events, weaker business performance or strategic opportunities could require additional equity or debt financing.
Management expects continued investment in member acquisition, mobile products, social media, international operations, hotel-booking capabilities, package offers and product development. The company expects fluctuations in cost of revenues, marketing expenses, product development, general and administrative expenses and effective tax rates.
- Local Deals and Getaways face declining voucher demand, competition, refund exposure and potential liabilities under gift-card, unclaimed-property and consumer-protection laws.
- Asia Pacific remains materially unprofitable and may require continued investment; foreign-currency movements negatively affected reported European revenue.
- Revenue depends heavily on online advertising, email engagement, audience growth and advertiser retention. Search-engine algorithm changes, mobile migration and rising acquisition costs could reduce traffic or margins.
- Hotel-platform and vacation-package initiatives may increase costs without generating expected revenue and may shift revenue toward lower commission-based economics.
- The company is exposed to tax audits, uncertain tax positions, international regulatory requirements, privacy laws, cybersecurity incidents, payment-processing risks and potential litigation.
- A voluntary program relating to former Travelzoo.com Corporation promotional shareholders remains an unquantified contingency. No payments were made in the reported periods, but future costs depend on valid claims and the company’s stock price.
- Azzurro held approximately 48.5% of outstanding shares and, through a proxy, controlled approximately 50.6% of voting power as of June 30, 2019.
Important Facts for Investors to Verify
- Whether revenue growth can improve after a period of near stagnation, particularly as Local revenue declines.
- Whether Asia Pacific losses can be reduced and whether North American profitability is sustainable after cost reductions.
- The conversion of reported member growth into active engagement, bookings and advertising revenue, given higher acquisition costs.
- Cash generation after stock repurchases, WeekenGO investment, lease payments and potential additional investments.
- The economic returns and accounting impact of the WeekenGO investment and related advertising transactions.
- Potential exposure from voucher refunds, unredeemed vouchers, tax matters, the former-shareholder program and other legal contingencies.
- The effect of ASC 842 lease liabilities on liquidity and future fixed obligations.
- Future dilution or financing needs if operating results weaken or strategic investments increase.